CDI Economic Summary: US continues to show resilience on healthy consumer spending

CHARLOTTE, North Carolina (ICIS)–Despite softening consumer confidence, the US economy continues to roll along, driven largely by a healthy services sector and resilient consumer spending – a disconnect between sentiment and reality.

Although the IMF has moderated its economic outlook for much of the world, it has bumped up its outlook for US GDP.

Starting with the production side of the economy, the September ISM Manufacturing PMI registered 49.0, up 1.4 points from August, but stretching into its 11th month of contraction. Production expanded, but new orders and order backlogs remained in contraction territory. The latter two are good indicators of future activity and both contracted at a slower pace.

Inventories also contracted, which could provide a floor for output. Amid weak demand, prices declined further. The ISM Services PMI eased 0.9 points to 53.6, a reading indicating slowing expansion.

Canada’s Manufacturing PMI remained in contraction while Mexico slipped back into contraction after seven consecutive months of improvement. Brazil’s manufacturing also weakened.

Eurozone manufacturing has been in contraction for 15 months, and the region is in recession. China’s manufacturing PMI was slightly above breakeven levels, and its recovery appears to be facing headwinds. Other Asian PMIs were mixed.

Turning to the demand side, US light vehicle sales improved in September, and although inventories ticked up, they remain low. After falling from 15.0m in 2021 to 13.7m in 2022 due to semiconductor shortages, economists see light vehicle sales of 15.4m units this year and next before improving further to 16.7m in 2025.

Pent-up demand and stabilising economic fundamentals will provide support for the auto sector. The last cyclical peak was 17.2m in 2018. However, with the UAW strike now affecting half of The Big Three’s output, supply could once again become a problem.

Homebuilder confidence fell further into negative territory. Housing activity peaked in spring 2022 and has since declined. The reports since May, however, indicate the slide may be stabilising despite higher mortgage rates.

The latest housing reports have been mixed. The consensus among economists is that housing starts will fall from 1.55m in 2022 to 1.40m in both 2023 and 2024 before improving to 1.54m in 2025.

Retail sales blew past expectations, rising 0.7% in September from August and were up 3.8% year on year. Sales were solid across most segments. Sales at restaurants and bars advanced 0.9% month on month and 9.2% year on year. Spending for services is holding up, but the overall pattern is rebalancing with additional spending for goods.

Job creation continues at a good pace and the unemployment rate is still at low levels. There are 1.5 vacancies per unemployed worker, which is fostering wage pressures in services. Incomes are holding up for consumers.

Headline CPI is now up 3.7% year on year (versus 8.9% in June 2022), and core CPI (excluding food and energy) is up 4.1%. Progress on disinflation is slow. Economists expect inflation to average 4.2% this year, down from 8.0% last year. Inflation is expected to soften to 2.6% in 2024 and 2.3% in 2025.

Disinflation is proceeding slowly, and the Fed’s quantitative tightening (QT) continues. A pause in hiking interest rates appears to be in order, although the pace of disinflation suggests higher interest rates for longer.

Our ICIS US Leading Business Barometer (LBB) has provided a signal consistent with recessionary conditions, but a “rolling recession” scenario continues to play out in housing and manufacturing. The services sector is slowing but still expanding. Recent readings show stabilisation in the LBB, an encouraging sign.

After real GDP rose 5.8% in 2021 and then slowed to 1.9% in 2022, gains so far this year leave economists expecting 2.2% GDP growth in 2023. A slowdown in economic activity is widely expected, and 2024’s economic growth should average 0.9% for the year before rebounding to 1.5% in 2025.

Looking overseas, new policy support has been initiated in response to China’s slow economic recovery. Confidence remains low, and debt and property issues continue to weigh on China’s economy at a time when global economic growth has slowed.

China GDP growth will likely remain below 5% for several years. In Europe, the economic cost of containing inflation has been high. Further progress may come at an even higher cost.